Life insurance policies and annuities are financial products that are purchased by individuals. Along with providing insurance protection, these products contain internal cash value which grows over time, much like a bank savings account. In general, this internal build up of value is tax-deferred, however, it may be subject to taxation upon certain contractual events. The Internal Revenue Code (IRC), which governs insurance and annuities, is quite complicated, and has been modified frequently over the last tell years.
Noteworthy sections of the Internal Revenue Code include sections 72(e), 7702, and 7702A. The latter is the most recent legislation, also called "The Technical and Miscellaneous Revenue Act (TAMRA) of 1986." It introduced testing rules that determine whether an insurance contract is being used as an investment rather than as insurance. Insurance company's were given seven years to comply with this legislation in their administration of insurance policies.
Many companies have been unable to achieve automated (non-manual) compliance with these laws. For many insurance companies, updating their current legacy (existing) administrative computer systems is a daunting task, because they are over twenty years old and are not constructed in a manner suitable to performing the complicated testing requirements. In addition, many companies have multiple administration systems requiring substantially the same tax processing.
There have been two primary conventional computer system approaches to this problem. The first conventional method is to update the current systems with tax related logic. This is usually done "inside" the current system and may be accomplished by using separate computer software subroutines. This is the response selected by many vendors of insurance administrative system software. This method generally has the computer programs call specific tax related logic at various points during the processing while supplying only the information required by the particular tax routine.
The second conventional method is to assemble tax related logic in a separate computer subsystem. Portions of this logic are specifically invoked when certain tax processing is desired. Generally, this approach relies on the primary system to "know" when to invoke certain tax processing based on the transaction being processed. This results in the separate tax system being "told" what tax processing to perform.
This approach often includes a "tax database," where tax related information is stored. This data is normally "contractual" data (in that it varies by a particular insurance contract) that the current system just is not storing.